Why the European Central Bank Can't Spur Growth

The European Central Bank is pushing to stimulate the economy, but this analysis says they won't get far.

Balance sheets at the Federal Reserve, the Bank of England, and the European Central Bank have been expanding like those tiny sponge toys that double in size with a few drops of water.

But the policy analysts at Bruegel, the Brussels-based think tank, say the ECB's efforts aren't likely to produce much.

While the long-term refinancing operations, injecting liquidity into banks, have removed the fear of imminent disaster, "the LTROhas had only weak effects on funding for households and non-financial corporations; credit dynamics remain weak particularly in the southern euro area," wrote Jean Pisani-Ferry and Guntram B. Wolff. "Underlying structural problems relating to banks, the macroeconomic adjustment and the euro area’s governance need to be addressed before financial stability and economic growth can return. Monetary policy cannot fundamentally address these problems and is made less effective by economic/institutional heterogeneity."

In other words, without more coordinated policymaking in the euro zone, the ECB's efforts to tame the debt crisis can only go so far.

That's potentially news for the euro. While the single currency got a lift from the reassurance the LTRO provided, the ECB's limited ability to generate more results could ultimately come home to roost.

As Pisani and Wolff put it, "The three-yearLTROhas been an appropriate response to a situation of extreme stress among European financial institutions. As long as the crisis of confidence continues, however, there are inherent limits to the LTRO's effectiveness. Additional ECB liquidity will not improve credit conditions in countries under stress. ECB policy is rendered less effective by the heterogeneity across countries and the incomplete fiscal set-up."